Michael Herbst: Hello, I am Michael Herbst, mutual fund analyst with Morningstar, and we are at the Morningstar 2009 Investment Conference in Chicago. This afternoon I have the honor of being joined by Kathleen Gaffney, the vice president and co-portfolio manager at Loomis, Sayles & Company where she manages a number of funds alongside Dan Fuss. Kathleen, welcome.
Kathleen Gaffney: Thank you, Michael.
Herbst: I wanted to ask you right off the bat when we spoke a couple of weeks ago, obviously Loomis Sayles is widely known and widely respected for its credit research in the bond world, and when you and I spoke about opportunities that you were finding these days, you had mentioned the idea that you were viewing certain kinds of bonds almost as substitutes for high-yield. And, that grabs my attention given the fact that Loomis, Sayles has been comfortable in the high-yield space for quite some time. Could you explain the thinking behind that?
Gaffney: Sure, Michael. As you know, we tend to define high yield in a very broad manner. And, what's interesting about the current market environment is the dislocations in the market that we have seen: very strong flows into all the credit markets, investment grade and high-yield--but specifically the high-yield with those very strong funds flows--and investors, I would still say, being somewhat cautious and defensive.Read Full Transcript
You have the higher-quality end of the market being, I would say, fair to probably expensive at this point given what the fundamentals are and then at the very low-quality end of the market, a significant amount of default risk. So, it really shrinks your universe of your buying opportunity a bit, and so we began thinking, "Where are there other opportunities?" And, high-yield to me really means high potential return for the amount of risk that you are taking. And, one market that seems to be very inefficient and seems to be possessing those high-yield characteristics is the securitized asset market.
Now there is a market that for now, for the time being, is rated triple-A, but we see a tremendous amount of downgrade pressure coming into that market and a lot of investors who are simply avoiding the market because of the destruction that we have seen due to the financial crisis in the housing downturn. So, a lot of uncertainty, but that's where our research comes into play.
And yes, we are known for credit, but we are doing fundamental research with the help of our securitized asset team. We have recently added to that group over the last year or two, and they are finding excellent value in CMBS. We are sticking to the super seniors where, because of the over-collateralization, you are picking up very attractive yields for the ratings even with the likely downgrades that we see happening.
Non-agency RMBS is also a very attractive area, but again high ratings, but likely to fall significantly into below investment-grade rating. So, really only appropriate for high-yield accounts, high-yield funds.